“What goes up must come down
Spinnin' wheel, got to go round
Talkin' 'bout your troubles, it's a cryin' sin
Ride a painted pony, let the spinnin' wheel spin….”
Expecting anything today, or this week?
OK, well, I am anyway - Still waiting on the key dates (BY) today 8/31 for the STB decision on the CN’s Voting Trust application re KSU, and the latter’s subsequent re-scheduled shareholder vote on 9/3 – then Labor Day weekend cookouts. As a reminder, don’t buy into the false precision on odds that continue to be reported (“CN has an XX% chance of getting the VT yadda yadda yadda”) which have as much science behind them as NFL line judges running out the chains after a 4th & 1 pileup of 22 300lb men and saying “HERE! This is where forward progress was stopped!” (Another reason to just choose baseball).
REMEMBER that just about every major event in the KSU "Odyssey" has occurred at aggressively "off-hours" such as the weekend or 6 am so stay tuned....and the decision on the VT is critical of course, but so could the wording from this very wordy Board. Are they allowing the VT? denying it in an attack on the very nature of the Voting Trust? Denying it as an attack on this merger (CNI+KSU) or all merger proposals (despite the two sets of merger rules in play)? And, what will happen next? Raised bids (and raised synergies)? activists (rumors abound....)
Hello again - and TCI (you remember them? They sure do in Jax) announced (off hours, natch) that they have a 5.2% position in CNI and intend to be active or activist; TCI is now the largest holder of CNI and CP - hmmm...The timing is interesting but I am guessing lucky - they couldn't have known that the STB would take the full allotted time for their VT decision (could they?). Beware the over-focus on margins (overgrowth - read the room!) being called for by some analysts in what I truly hope might be the last stand of the Cult of the OR.
So, some thoughts while spinning our wheels:
First, (next week) NARS is still live, right after Labor Day, but is offering a “Virtual Option” (for attendance, as opposed to what I wish the Dodgers had offered to Trevor Bauer) – see at the very bottom. And this is after the Chicago Traffic Club canceled its annual dinner, which was to be held in conjunction with NARS. But I retain high hopes for NARS, where STB Chairman Marty Oberman (9/8) and 6/7 Class One CEOs speak - and I run a “Fireside Chat” with KSU’s Pat Ottensmeyer and….CNI’s JJ Ruest (the 2021 RailTrends Railroad Innovator of the Year – see www.railtrends.com ). At least I assume that’s the lineup for me to “chat” with….Hopefully, Delta won’t further interfere, and Ida will recede without too much damage to life and treasure (and infrastructure).
Meanwhile, as Steven Colbert says….a catch-up on a few things, a fast highlighting of some and a meandering discussion on a few others:
Power of Index Funds – those funds that (FT) “hitch a free ride on the backs of stock pickers – have been facing increasing scrutiny, especially involving proxy and other votes and cross-ownership (for example, of all three of the railroads eagerly awaiting the STB decision) raises issues….added to issues of transparency as analyzed in a now-famous report by Professor John Coates of HBS who is now in a position (as Deputy head of the SEC/CorpFin) to do something about it. The fear is that the so-called big 3 firms would have undue control
Supply Chain/Service remains a hot issue or set of issues, really, even as it appears that, statistically anyway, the jobs situation is improving.
- It’s obviously not just rails, or even land-based – the over-flow to air freight has caused major congestions at airports – including in Chicago
- Several shippers, notably Walmart, Home Depot, and Target, have chartered ships – and even a carrier, Schneider (which is trying to get its ordered new 53’ containers over here from China; the shortage of domestic boxes is itself worthy of a whole report)
- Ecommerce is now 20% of US retail sales (6-months) versus 14% in 2018 (AMZN is 40% of the eCommerce total)
- In an article (NYT) entitled “Why Supply Chains are a Mess”, using a container moving from Indonesia to Orlando, noted that ocean time had increased from ~38 to 53 days (40%). North American land time increased by a similar % but from 5 to 7 days (inland Asia from 8 to 18 days). Meanwhile, Bloomberg reports on one particular container of fertilizers in China bound for BC then the US Midwest is still in Shanghai despite being ordered….in February. Note – neither article featured the word “railroad”
- What’s going on with shipping rates? | McKinsey
- LA/LB’s D-Day reenactment got even bigger – a near-term record 44 ships
- Despite that, International Intermodal continues to grow – IANA reports July was up 8%, over-matching the 8% decline on the domestic side to produce a light YOY gain for the month (+0.5%)
- And IM continues to be a bargain (sorry Marty) – the JoC reports that the 12 month rolling average of its “Container Pricing Index” is 131 (meaning a 31% discount to all-road; a spot at 117 was closer but IM is a contact (90%T) market….
- BNSF parks some boxes in Harvard Yard – Arkansas, that is, as it re-opened the international side of the Harvard Terminal (now that should be the start of the Knowledge Corridor!)
Ag/Grain – a new report suggests that China is tracking at 90% of its Phase One import target, suggesting there’s life on the demand side yet, really the key question in the intermediate-term grain outlook. The USDA suggests that this crop year (20/21) will show a 56% increase in exports….but what about 21/22? Ocean shipping rates have forced more grain to the Gulf from the PNW, which has volume/margin hits for rails overall. This is according to the US Farm Report experts – however, my own in-house Ag Expert suggests that “the center or Texas Gulf are residual destinations because the drawing arcs pull the grain elsewhere” (this excludes grain to Mexico of course). On the demand side,9 there have been concerns too but the recent Pro Farmers Crop Tour of the US suggests that the USDA crop production estimates are too low, by 2% for corn and 7% for beans.
ESG – Quick Thoughts (this is still a rail focus once we get past M&A and fighting with the STB)
- Looking at climate, the impacts on rail or on any industry are multifold (their own emissions, their suppliers, their contributions to their shippers’ footprints – IM vs OTR, etc). A key driver will be supply chain management, which at least tactically (so far) plays to rail strength
- Risk Management has a new headache; accountants a new line of business, rating agencies a new way to print money
- And it’s not just coal shippers (and oil) under attack:
- Steel/Cement/Chemicals al under varying degrees of spotlight
- Iron/steel produce ~7%+ of fossil fuel emissions; the cost to “de-carbonize” is estimated in the “hundreds of billions of dollars”
- My gut tells me that after the pandemic (and the revival of one-use plastic bags etc) that plastics are the next battleground, something that ex-CSX Vice-Chairman Clarence Gooden warned us all about in 2018. Only 10% of plastics are recycled, and their waste is unsightly as well as climate degrading – and China isn’t taking US waste anymore (another piece of collateral damage from the Trade War). It will be interesting to see how the O&G industry’s bet on petrochemicals in the US Gulf will play out – as a delaying tactic or something else? And Shell is expected to open their big new PA plant next year….We will hear about this issue and the industry’s prospects from Bruce Chinn, CEO of Chevron Phillips Chemical Company at NARS (NARS-2021-Annual-Meeting-agenda-2.pdf (railshippers.com)
- It ain’t going away – over ¾ of companies in the S&P 500 have ESG or climate disclosure (but how to standardize and truly measure? See below). BofA reports that 40% of assets under management are ESG-oriented (to varying degrees)
- Janet Drysdale, CN's VP of ESG, just addressed the inaugural Wolfe ESG Conference, as a sign o' the times ( Janet Drysdale, Vice-President Sustainability to address Wolfe Research’s Inaugural ESG Conference on August 26 | cn.ca )
- The FT reports that ~1/2 of “Climate Themed Funds” invest in Big Polluters such as Oil & Gas; companies cited by some consultants and others as trailing (or trailing at some point) include Berkshire Hathaway and, ironically, Blackrock
- The same publication has taken some contradictory positions on ESG within its pages such as (and this is true) “The appeal of ESG investing is for dupes only” and “Why ESG investors make more money”! The WSJ has long wondered “Which Stakeholders to benefit?” but also “CEOs ignore social issues at their peril”, considering specific issues like the MLB All-Star game, etc
- Maersk, ever in the news, placed an ($1.4B) order for 8 new ships that can be run on “green meth(ane)” – the ships cost ~15% more, and the fuel is ~2X bunker costs, but Maersk believes that ESG-focused shippers will readily pay the extra freight, as it were.
- It’s not all climate (of course) but also diversity – see proposals sent to UNP and Berkshire
ESG, cont. – Shareholder versus (?) Stakeholder – as heard in the vigorous KSU debate! Overall, is it merely lip service? Virtue signaling? A bull-market idea? I guess I would answer No/Yes?/No – it does appear to be here to stay, at least in discussion form, ever since the Business Roundtable BRT) Statement seemingly refuting Milton Friedman (“the social responsibility of business is to increase profits”, Op/Ed NYT 1970)….But how do you measure (see ESG)? How do you account for fiduciary duty (remembering Friedman, and also remember that most shareholders, via funds, represent the middle classes, and union funds bring in the blue-collar world)? Is the right thing the profitable thing?
- The Andersons is exiting the rail business, selling its 20K rail car fleet to a unit of ITE (a good friend noted the timing was good given July Ag volumes – but surely no one is that short term oriented?); their rail-car repair business is also said to be on the market
- KCS is still doing business (well, of course, but they announced an interesting new transload hub JV with Savage Industries in Louisiana – a region that just may be divested of course
- BusinessWeek profiles a hot new (to me) asset class – FedEx Ground routes!
- Tell all the folks in China too - OOCL has started a rail service linking China to Europe than by ship to the US east coast; the trains' current capacity is 50 boxes